A Video(s) Primer on Public Choice Economics

One of the great flaws of Keynesian economics is that proponents assume policy makers are angels who are motivated solely by a desire to help people by boosting the economy when there’s a downturn.

Needless to say, that’s an absurd assumption. To cite just one real-world example, we can see how Obama’s stimulus scheme was simply an opportunity for politicians and interest groups to do what they like doing regardless of the economy’s performance, which is to have fun with other people’s money. Think scams like Solyndra, but expanded to almost all parts of the federal budget.

This sober-minded assessment of how government really works is sometimes categorized as being part of “public choice economics.”

Here’s what I wrote about this theory earlier this year, as part of a column explaining why politicians will keep spending even if they know it will lead to disaster.

…there’s an entire school of thought in economics, known as “public choice,” which is based on making real-world assumptions about the self-interested behavior of politicians and interest groups. …In other words, both voters and politicians can have an incentive for ever-larger government, even if the end result is Greek-style fiscal chaos because taxes and spending reach ruinous levels. I call this “Goldfish Government” because some think that a goldfish lacks the ability to control its appetite and therefore will eat itself to death when presented with unlimited food. …America’s Founding Fathers had the right solution. They set up a democratic form of government, but they strictly limited the powers of the central government. This system worked remarkably well for a long period, but then the Supreme Court decided that the enumerated powers listed in the Constitution were just a suggestion.

One of the key insights of public choice theory is that we often get excessive government because the people getting handouts from any particular program have a very strong incentive to lobby for those goodies while the average taxpayer often does not have the time, knowledge, energy, or incentive to to either learn what’s happening or to figure out how best to fight against the various counterproductive redistribution programs.

Here’s a video from Learn Liberty that explains how “concentrated benefits” and “dispersed costs” produce bad outcomes (and if you have any doubts that this is true, just think about the Export-Import Bank or farm subsidies).

By the way, I hope everyone noticed, in the hypothetical law that was discussed, that half the money collected from taxpayers would be burned.

This is an under-appreciated reason why redistribution is so damaging. I’ve tried to make this point by talking about how federal spending involves taxing people around the nation, carrying the money in a leaky bucket to Washington, pouring some of it down a toilet, and then carrying it in a leaky bucket back to interest groups in various parts of the nation.

Building on these concepts, Professor Ben Powell uses the example of farm subsidies to explain how we get bad policy (think ethanol).

Kudos to Ben (who also narrated a great video on “sweatshops”). I particularly like his explanation of how interest groups recycle money back to politicians.

At this stage, you may be thinking that fixing the mess in Washington is hopeless. After all, if it’s in the self interest of politicians to expand the burden of government to buy votes and win their next elections, then aren’t we doomed to have “goldfish government”?

That’s certainly what’s happened in nations such as Greece that presumably have reached and surpassed a “tipping point” of too much government dependency.

But here’s why I think there’s still hope for the United States.

…asking politicians to reduce government is like asking burglars to be in favor of armed homeowners. …we know politicians generally have bad incentives. But it’s not hopeless. While I certainly enjoy mocking politicians, they’re not totally immoral or even amoral people. Many of them do understand there’s a problem. Indeed, I would argue that recent votes for entitlement reform are an example of genuine patriotism – i.e., doing the right thing for the country. So is there a potential solution? Maybe. Let’s use an analogy from Greek mythology. Many politicians generally can’t resist the siren song of a go-along-to-get-along approach. But like Ulysses facing temptation from sirens, they recognize that this is a recipe for a bad outcome. So they realize that some sort of self-imposed constraint is desirable. And that’s why I’m somewhat hopeful that we can get them to impose binding spending caps. We know there are successful reforms by looking at the evidence. And we know there is growing support from fiscal experts. And we even see that normally left-leaning international bureaucracies such as theOECD and IMF acknowledge that spending caps are the only effective fiscal rule. So if Ulysses can bind himself to the mast and resist the sirens, perhaps we can convince politicians to tie their own hands with a Swiss-style spending cap.

P.S. Though whenever I think about the 2016 election, I confess that’s it’s hard to be optimistic.

[…] bad people. When people ask me what motivates politicians, I sometime explain the theory of “public choice.” In other cases, I tell the simple story of the guy who is endlessly conflicted between an […]

[…] Corruption – He points out that a government with lots of power and control will be very susceptible to misbehavior as interest groups and politicians figure out ways of scamming the system. Very similar to the […]

[…] Corruption – He points out that a government with lots of power and control will be very susceptible to misbehavior as interest groups and politicians figure out ways of scamming the system. Very similar to the […]

[…] point. Most bureaucrats are no better or no worse than the rest of us. Given the perverse “public choice” incentives inherent in government, however, the good bureaucrats often are lured into bad […]

[…] Mancur Olsen was a very accomplished academic economist who described the unfortunate tendency of vote-seeking governments to behave like “stationary bandits,” seeking to extract the maximum amount of money from […]

[…] Mancur Olsen was a very accomplished academic economist who described the unfortunate tendency of vote-seeking governments to behave like “stationary bandits,” seeking to extract the maximum amount of money […]

[…] government while folks on the right advocate lower taxes and smaller government (thanks to “public choice” incentives, many supposedly pro-market politicians don’t follow through on those principles […]

[…] government while folks on the right advocate lower taxes and smaller government (thanks to “public choice” incentives, many supposedly pro-market politicians don’t follow through on those principles […]

[…] P.S. I mentioned at the start of this column that it would not be unreasonable to think that the tax code was deliberately designed to maximize economic damage. But even a curmudgeon like me doesn’t think that’s actually the case. Instead, our awful tax system is the result of 104 years of “public choice.” […]

[…] P.S. I mentioned at the start of this column that it would not be unreasonable to think that the tax code was deliberately designed to maximize economic damage. But even a curmudgeon like me doesn’t think that’s actually the case. Instead, our awful tax system is the result of 104 years of “public choice.” […]

[…] the politicians and interest groups won’t care. They are interested in accumulating power and obtaining unearned benefits. To the extent that they would even bother to read the study, they would conclude that they should […]

[…] competition is a very valuable liberalizing force in the world economy. It partially offsets the public choice pressures on politicians to over-tax and over-spend. If governments no longer had to worry that […]

You make very good points, well beyond the understanding of the common citizen, for whom “free stuff” has such strong appeal.

Public Choice basically argues that while markets may exhibit instances of “market failure”, government also exhibits “government failure”. If government attempts to correct market failures, there is no assurance that government’s involvement will make things better.

However, government interference can be so profitable for a small elite with political influence that government also interferes in markets where there is no market failure. This is certainly true in complicated environments like banking and healthcare.

The case for smaller government is clear. Dan makes the argument that this can only be stopped with spending caps. I would argue that spending caps would be good, but would not stop the spread of regulation. Spending and regulation can only be reduced by eliminating the regulators and bureaucrats first.

While concentrate benefits and dispersed costs are a factor in bad policy, I
disagree that it is the main factor.

The main factor is that the benefits of redistribution and spending are immediately visible — but a fixed factor! While the benefits of higher growth are in the future — but compounding and exponential!

Related is the voter’s inability to comprehend the magnitude of a compounding four to five percent structural annual growth rate — compounding to seven hundred percent in fifty years.

The voter is unable to comprehend these magnitudes because everybody– anybody– is unable to predict future growth details. Hence, we are unable to predict the immense life changing technologies and changes inherent in a seven hundred percent compound growth (it is only through technological change that a seven fold increase in prosperity actually happens, since growth and prosperity means far more than the mere accumulation of more capital and money).

Unable to visualize future growth developments and unable to comprehend the arithmetic enormity of high growth compounding, the voter-lemming reaches for the more palpable ten percent fixed improvement to his prosperity through redistribution and communal spending — ferrets out from amongst three hundred million people those politicians who can offer him this dream — and elects them to high office.

Some, few — very few — jurisdictions, almost serendipitously, avoid this standard fate.

My duty to my family is to identify these jurisdictions and steer my children in those geographical directions — like I did when I moved from Europe to America. With America’s Europeanization now written on the wall, it is time for the next generation in my family to make the next move. I suggest to readers of this blog that beyond reading and philosophizing about Liberty they do the same and share their observations, like the very useful comparative analyses that Mr Mitchell provides.

P.S. An effective approach would be to show how public choice and the underlying interests of politics skew public opinion in favor of fixed redistribution and spending over compounding exponential growth. While that might be good for public policy, the most effective personal policy is to move amongst those voters who already understand that.

Dan, you wrote: “an opportunity for politicians and interest groups to do what they like doing regardless of the economy’s performance, which is to have fun with other people’s money.” You are too nice. It should have been, “which is to enrich themselves and their friends with other people’s money.” Of course, I guess that could be a subset of “having fun,” but I think it is more to the point.